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Reevely: The $309-million Toronto office tower mistake

Author of the article:

David Reevely

Publishing date:

September 24, 2014 • 3 minute read

An architectural rendering of the MaRS Phase 2 tower the provincial government is buying rather than losing it to a loan default because Toronto's MaRS Discovery District can't fill it with tenants.Rendering from MaRS Discovery District

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The problem isn’t so much that you and I are buying this mostly empty office building in downtown Toronto. The problem is that nobody will quite explain how we got into a position where we have to.

It’s a nice building in a prime location, on University Avenue just south of Queen’s Park and on the edge of the hospital district. Twenty storeys, brand new. Right on top of a subway station. Lovely finishes.

Reevely: The $309-million Toronto office tower mistakeBack to video

Unfortunately, it was built to be part of the MaRS Discovery District, a government-supported incubator for life-sciences companies spun out of the Toronto hospitals and their research centres, and it hasn’t worked. It’s supposed to be a high-tech laboratory building and high-tech lab-oriented companies haven’t moved in.

This might have something to do with the fact that one occupant the building has signed is a laboratory operated by Public Health Ontario, a Level 3 lab for working with deadly germs (the scale goes up to 4). There’s also been a glut of such space on the Toronto market lately, with multiple hospitals opening new research facilities.

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It’s a little difficult to disentangle all the entities involved in the MaRS operation. They’re virtually all half-public, half-private corporations of one kind or another: hospitals, heavily subsidized private non-profits, Crown agencies. But what it comes down to is that the MaRS people haven’t been able to find tenants for the building, the real-estate company that built the thing needs to be paid, and the provincial government is holding the bag.

The solution, revealed Tuesday by Economic Development Minister Brad Duguid and Bert Clark of Infrastructure Ontario, is that the government is effectively buying the building for MaRS. It has made a conditional deal with U.S.-based Alexandria Real Estate that will make Alexandria go away and will give MaRS control of the leases. In theory, the government will get paid back the money it’s sinking in, but if not, the bottom-line cost to taxpayers will be $308.8 million.

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(If this sounds familiar, it’s because the provincial Tories revealed the plan in draft form during the provincial election campaign last spring. It is now coming to pass.)

“This will increase occupancy revenues and produce long-term stability for this important site,” Duguid said in a conference call with reporters from across the province. It will allow “greater flexibility on lease rates, and the terms and types of tenants for the MaRS building.”

The top-end lab tower won’t have to be occupied by top-end biotechnology and medical-research companies. Maybe the eventual tenants won’t pay as much as we were expecting. But at least we’ll get somebody in there. Possibly ordinary provincial bureaucrats, moved in from other offices around Toronto.

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The details are to be sorted out over the next few months by a two-person panel of investment guru Michael Nobrega and retired Western University business-school dean Carol Stephenson, who’ll balance the need for the building to make some kind of financial sense with the province’s desire to have it perform a semblance of its intended function. Supposedly it’s been valued independently at just over $300 million.

In all, this sounds like they’re making the best of a bad situation. What would be more reassuring is if we knew how we got into the bad situation so we would know we aren’t going to get into it again.

Who thought it was a good idea to construct this building we can’t now find tenants for is not a question either Clark or Duguid was prepared to answer on Tuesday’s call.

All Clark would say is that the project went through a rigorous vetting process like all of the projects Infrastructure Ontario supports, as if that doesn’t raise more questions than it answers.

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All Duguid would do was attack the question, pretending he was being asked to justify the idea of economic development as government policy. As the economic development minister, that’s a challenge he was happy to take on. MaRS is an economically vital thing, Toronto has a vibrant research cluster, and the government just won’t walk away from it. “It’s important work and we believe it needs to continue,” he said.

So if you’re saying the Ontario government should sit on its hands while other jurisdictions encourage their life-sciences industries, why, Brad Duguid just doesn’t understand you.

How, precisely, the life sciences are encouraged by spending up to $309 million on an office tower we can’t rent to the people we meant to rent it to remains unclear.

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